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The dismal truth about hedge funds and how investors can get a greater share of the profits

Shocking but true: if all the money that's ever been invested in hedge funds had been in treasury bills, the results would have been twice as good.

Although hedge fund managers have earned some great fortunes, investors as a group have done quite poorly, particularly in recent years. Plagued by high fees, complex legal structures, poor disclosure, and return chasing, investors confront surprisingly meager results. Drawing on an insider's view of industry growth during the 1990s, a time when hedge fund investors did well in part because there were relatively few of them, The Hedge Fund Mirage chronicles the early days of hedge fund investing before institutions got into the game and goes on to describe the seeding business, a specialized area in which investors provide venture capital-type funding to promising but undiscovered hedge funds. Today's investors need to do better, and this book highlights the many subtle and not-so-subtle ways that the returns and risks are biased in favor of the hedge fund manager, and how investors and allocators can redress the imbalance.

The surprising frequency of fraud, highlighted with several examples that the author was able to avoid through solid due diligence, industry contacts, and some luck

Why new and emerging hedge fund managers are where generally better returns are to be found, because most capital invested is steered towards apparently safer but less profitable large, established funds rather than smaller managers that evoke the more profitable 1990s

Hedge fund investors have had it hard in recent years, but The Hedge Fund Mirage is here to change that, by turning the tables on conventional wisdom and putting the hedge fund investor back on top.

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Editorial Reviews

Review

"Simon Lack, a hedge fund veteran exposes some unforeseen and uncomfortable truths about the industry in his new book." (Hedge Fund Net, January 2012)

"...a cautionary tale from one who knows just about all the tricks...an easy, largely fun and certainly instructive read" (Financial World, February 2012)

"Devastating little book.... His conclusions will make uncomfortable reading for many self-styled 'masters of the universe'.... This book should be required reading for pension fund trustees." (Jonathan Ford, Financial Times, 19th February 2012)

From the Inside Flap

Sure, hedge funds have produced some of the greatest fortunes in recent years, but the shocking reality is that investors would have made more putting their money into treasury bills instead. And while hedge funds have proved to be serious moneymakers for those that manage them, investors themselves rarely reap the benefits. In The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True, hedge fund expert Simon Lack blows the lid off the secret world of this class of investments, teaching you everything you need to know to maximize your own returns.

Drawing on an insider's view of hedge fund growth during the 1990s, a time when investors in the field did well in part because there were relatively few of them, The Hedge Fund Mirage chronicles the history of the hedge fund, highlighting the many subtle and not-so-subtle ways that returns and risks are biased in favor of the fund manager, and how investors and allocators can redress this imbalance. Packed with information about the industry and what's wrong with it, the book steers you away from the traps that befall so many investors. Full of helpful pointers on how to really get the most out of your hedge fund investments, it encourages using new and emerging hedge fund managers whose returns are generally better, negotiating more assertively for stronger investor rights, and warns anyone putting their money in the hands of a manager to demand complete transparency at all times.

Hedge fund investors have had it tough in recent years, but that doesn't mean that there isn't money to be made. As the success of hedge fund managers shows, opportunities are there. The dilemma for investors is figuring out how to identify managers you can trust and learning the techniques to keep more of the money generated using your capital. The Hedge Fund Mirage is here to help, turning the tables on conventional industry wisdom to put you, the investor, back in charge.

More About the Author

Following 23 years with JPMorgan, Simon Lack founded SL Advisors, LLC, a Registered Investment Advisor, in 2009. Much of Simon Lack's career with JPMorgan was spent in North American Fixed Income Derivatives and Forward FX trading, a business that he ran successfully through several bank mergers ultimately overseeing 50 professionals and $300 million in annual revenues. Simon Lack sat on JPMorgan's investment committee allocating over $1 billion to hedge fund managers and founded the JPMorgan Incubator Funds, two private equity vehicles that take economic stakes in emerging hedge fund managers. Simon Lack's deep experience in financial markets, managing complex trading businesses and overseeing hedge funds provide him with a unique perspective from which to manage investments and advise clients. Simon chairs the Investment Committee of Wardlaw-Hartridge School in Edison, NJ and also chairs the Memorial Endowment Trust Investment Committee of St. Paul's Episcopal Church in Westfield, NJ. Simon is a CFA charterholder, and the author of The Hedge Fund Mirage (release date January 2012).

Most Helpful Customer Reviews

This is really two books. Chapters 2 - 8 are a clear, detailed and accurate discussion of how and why to invest in hedge funds. The author weaves anecdote, simple examples and common sense into an entertaining and informative guide. It requires no financial or mathematical sophistication to follow, but it delves into important details that too many investors neglect. These chapters would make it a worthy companion to John Bogle's great Common Sense on Mutual Funds. Much of the message is the same: pay attention to fees, expenses and tax efficiency; do business with honest people; understand the product; have reasonable expectations; be prepared for losses; keep a steady course.

Unfortunately, these chapters are bookended by sensational nonsense. The calm expert who understands hedge funds is replaced by an idiot trying to get attention. It's not so much that the wild claims are wrong, it's certainly true that many--even most, depending how you count--hedge funds charge too much and fail to deliver the promised investment characteristics. The problem is that in his effort to overhype the evidence, the author gets things completely wrong (Chapter 1) which leads to some foolish advice (Chapter 9).

To start, the author explains the difference between time-weighted and value-weighted returns. An investor puts $1 million in a fund that has a +50% return, he adds another $1 million, the fund then has a -40% return. Net, the investor has lost 25% of his money. The fund will report a compound average annual growth rate of negative 5.13%. The investor lost more than that (25% over two years or negative 13.40% CAGR) because he put more money in for the bad year than the good year.Read more ›

This book has shaken a few feathers in the Hedge Fund community. Its basic take is that the apparently superior returns of the hedge fund industry compared to traditional sources are not real, & to the extent that they do exist they have been taken in fees by the manager. The real return for investors, over the long term has been little more than 1%, half what could have been earned from just investing T-Bills he claims. This is a startling claim, but unfortunately the way that Lack derives these numbers does not seem to be internally consistent, or even reasonable in some cases, which unfortunately casts doubt on his whole approach.

I should say at this point that I have seen many hedge funds at close quarters, both from the inside and outside, but have no current involvement with the industry & no axe to grind. Also, I have long suspected that much of Lack's basic position is true: that overall the hedge fund industry has not performed as well as the hype would suggest, that hedge funds performed better when they were smaller and more nimble, & that the fee structure is inequitable, with the managers keeping too much of the upside for themselves. In fact this is a view that is pretty widely held & is not in itself controversial, if not universally accepted. However, Lack takes this view further than most, arguing that investors would have been better off investing in Treasuries! It is this conclusion, and the way Lack supports this with a detailed analysis of returns & fee structures that is controversial

Lack has an immense amount of experience of investing in the industry, and for anyone looking at hedge funds as an investment there is a wealth of practical advice about how to look at these strange animals.Read more ›

I've heard the media say that the rich invest in hedge funds which out perform mutual funds and that is why their wealth is growing. And we commoners don't have the million bucks to become a client. Simon Lack has all the insider numbers that completely demolish the media's infomercial. We just saved ourselves a lot of pain and suffering. He also discusses short sellers and mergers.

Here are some of the secrets:Hedge funds are not required to report their results. So the top earners report theirs, the rest don't. The gross profit is reported but once the fund pays itself and its owners the investor gets about what he would have in an index fund.

1998-2010 hedge fund avg. return was 7.3% but when true losses (not percentages) are used the return was 2.1%. If you owned corp. bonds 1998-2010 you averaged 7.2%.

In 2008 hedge funds lost more than all their profits in the previous 10 years and they refused to allow you to get your money out.

Chapter 3 explains the attraction of helping to fund a start-up hedge fund to big banks and speculators. Like a chain letter, the first ones in get most of the payout. George Soros became a billionaire running his hedge fund for the fees not by investing in the fund. "Never in the history of Finance was so much charged by so many for so little".

In 2010 out of $83 billion in profit, $38 billion went to fees.

P.147 "An unfortunate feature of hedge funds is that if you want to defraud people, a slightly mysterious trading strategy with an apparently strong history of performance in a limited partnership structure generally outside the the regulatory framework is one of the best ways to do it."